A Long term perspective matters because time is the “exponential” function. This has, in turn, the largest impact on the final investing outcome.
Yes, other things like initial corpus, periodic additions and rate of return matter. However, nothing can make up for time in the real world. Just observe the formula for compounding.
Amount = Principal * (1+ Return) ^ Time
Time matters most. Simple. Especially in Equity investing, the longer you have, the lesser the chance of losing money and the greater the chance of you achieving an inflation-beating return on your investment.
Just look at the data. Rs. 1,00,000 lump sum investment that compounds at a rate of 12% generates the following values:
3 years | 5 years | 10 years | 15 years | 20 years | 25 years | |
Value at the end of the period | 1,40,493 | 1,76,234 | 3,10,585 | 5,47,357 | 9,64,629 | 17,00,006 |
Long-Term Investing and Predictability of Returns
A long-term outlook helps investors since it reduces the volatility to returns, i.e. the range of outcomes is closer to the average, allowing for higher predictability of returns, thereby, better planning.
Holding Periods | 3 Years | 5 Years | 7 Years | 10 Years | 15 Years | 20 Years | 25 Years |
Average Return | 14.5% | 14.3% | 14.9% | 15.0% | 14.7% | 14.4% | 13.5% |
Standard Deviation | 14.0% | 10.5% | 6.3% | 4.1% | 2.2% | 1.8% | 0.6% |
Long-Term Investing and Better Outcome Ranges
Long Term Investing and Better Outcome Ranges:
Here, we can observe that by increasing the investment duration, the standard deviation reduces. This thereby increases the probability of generating a positive final outcome that also exceeds a satisfactory return.
Holding Periods | 3 Years | 5 Years | 7 Years | 10 Years | 15 Years | 20 Years | 25 Years |
Upper Range | 28.5% | 24.9% | 21.2% | 19.1% | 16.9% | 16.2% | 14.2% |
Lower Range | 0.5% | 3.8% | 8.7% | 11.0% | 12.4% | 12.6% | 12.9% |
The graphical representation of the above table is mentioned below:
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